U.K. Banks Brace for Election 'Wobble'

Shares in British banks fell Friday on worries about the economy faltering in an uncertain political climate.

Prime Minister Theresa May said she will form a government and is looking for support from the Democratic Unionist Party, a small Northern Irish party, after her Conservatives failed to win a majority in Thursday's snap election.

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But investors weren't immediately convinced by the plan and shares in Royal Bank of Scotland Group PLC, Barclays PLC, Lloyds Banking Group PLC and other domestic lenders only marginally improved from earlier losses of 1% to 4% following Ms. May's statement early Friday afternoon. The Euro Stoxx index was up 0.3%.

Bank analysts said consumer confidence could wobble because of political instability or if Britain's plan to leave the European Union is delayed. U.K. economic growth slowed in the first quarter as consumers pared spending, and banks have been starting to pull back from a four-year lending binge in unsecured credit.

Chirantan Barua, an analyst at Bernstein, said the election could by a catalyst for draining excess liquidity from the banking system. He said the U.K. could find it hard to draw in capital and investments until the political situation clarifies.

Shares in Royal Bank of Scotland fell as much as 4% early Friday on the heightened chance of the main opposition party gaining power if a second election is needed. The Labour party in its election manifesto said it would break up RBS into smaller local lenders, which analysts say would prolong a nine-year effort to move the bank from 71% state ownership.

A fall in the pound Friday was good news, though, for the U.K.'s Asia-focused banks HSBC and Standard Chartered, and their shares climbed slightly. The two banks' stocks became cheaper to buy with dollars, and most of their revenues aren't in pounds. HSBC makes about 25% of its revenue in the U.K. while Standard Chartered has only minimal sterling-denominated revenue. This means that profits will be higher when translated into weakened sterling.